"How did Economists Get it So Wrong?"

Kim Kastens
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published Sep 7, 2009

In yesterday's New York Times magazine, Nobel prizewinner economist and columnist Paul Krugman asked "How Did Economists Get it So Wrong?" Earlier this year, in Mother Jones, journalist Dean Starkman asked "How could 9,000 business reporters blow the biggest story on their beat?" Starkman cited a multitude of intertwined factors, including failing financial health of the media industry with consequent newsroom layoffs, desire on the part of business journalists to keep on good terms with key sources inside corporations, and less investigative work by federal regulators. What with one distraction and another, almost all business journalists failed to anticipate that economic collapse was imminent or inevitable. Krugman cites a different multitude of intertwined factors, including mistaking an internally coherent line of reasoning for a correct line of reasoning, and academic infighting.

Both writers' arguments are clear and compelling as far as they go. But I think there is another reason: Most people who grew up to be today's economists and business journalists never studied Earth System Science.

Almost all business reporters and economists start from the deep-seated premise that economic growth is good: An increase in consumer spending is good. An increase in housing starts is good. An increase in gross national product is good. The most successful government or business is one that fosters the most growth.

But Earth System Science views the Earth as an (almost) closed system for mass. In a closed system no thing can continue to grow indefinitely, and no process can continue to accelerate indefinitely. Eventually, growth slows and stops, either gradually or abruptly, under the influence of stabilizing feedback loops. Gravity and erosion eventually halt the growth of mountains; competition for food eventually halts the growth of animal populations; competition for light eventually halts the growth of plant populations.

The Earth Systems perspective and the Foster Growth perspective are not compatible over the long run. Although Foster Growth can be a good strategy for a limited time over a limited space, it cannot be a successful strategy for all the peoples of the planet over the long run. I've recently run across two eloquent voices making the case that continued economic growth is not possible on a finite planet and that that we therefore need to figure out how to create an economy that produces livelihoods and satisfaction for the populace without requiring perpetual growth--a "steady state economy."

Cover of book "Shoveling Fuel for a Runaway Train"
Wildlife biologist Brian Czech makes the case in terms that will resonate with earth and environmental scientists. He runs a non-profit called The Center for the Advancement of the Steady State Economy, and wrote a light-hearted but dead-serious book called Shoveling Fuel for a Runaway Train.
Cover of book "Ecological Economics"
Herman Daly, of the University of Maryland School of Public Policy, makes the case in an economist's vocabulary. You can find the short version in a Scientific American article and the long version in a textbook, Ecological Economics.

Those of us teaching Earth Science for high school or undergrad non-science majors may have future business people or business journalists within the sound of our voice this very semester. How can we work this topic into an Earth Science course? One route, for those so inclined, is through the work of petroleum geologist M. King Hubbert. Best known among geologists for his prescient prediction of the peaking of U.S. oil production, Hubbert also wrote of the incompatibility between the Foster Growth worldview and the Earth System worldview:

"The world's present industrial civilization is handicapped by the coexistence of two universal, overlapping, and incompatible intellectual systems: the accumulated knowledge of the last four centuries of the properties and interrelationships of matter and energy; and the associated monetary culture which has evolved from folkways of prehistoric origin....Despite their inherent incompatibilities, these two systems during the last two centuries have had one fundamental characteristic in common, namely, exponential growth, which has made a reasonably stable coexistence possible. But, for various reasons, it is impossible for the matter-energy system to sustain exponential growth for more than a few tens of doublings, and this phase is by now almost over. The monetary system has no such constraints, and, according to one of its most fundamental rules, it must continue to grow by compound interest."

from Two Intellectual Systems: Matter-energy and the Monetary Culture.

Returning to Mother Jones, in the same issue as the Dean Starkman article I find the Editor's Note by Monika Bauerlein and Clara Jeffery, writing of the billion dollar bailout requests coming from financial and automobile companies:

"...But what can we do except pick up the tab? We have been trained, after all, to regard the movements of finance like the forces of nature...."
Perhaps true--but the people who fall for that false analogy haven't been taught enough about the forces of nature to spot the fallacy.




"How did Economists Get it So Wrong?" --Discussion  

Kim: there is most certainly a divergence in societal policy between the Laws of Nature (as represented in Earth System Science) and Economic Laws. The "free market" is lauded as being the most efficient (and therefore the best) mechanism to promote social progress. But is efficiency necessarily a good thing? In nature, certain geologic phenomena are extremely efficient in moving large amounts of mass and energy: hurricanes, floods, landslides. When humanity gets in the way we call these catastrophes. Human interventions in natural processes can also lead to greater efficiencies: urbanization and emplacement of storm drains, decrease in wetland area to accomodate accelerated growth, which ultimate conspire to result in efficient transfer of water to channels beyond their capacity, which we then recognize as floods. The same catastrophic results might be recognized in the tendency of financial institutions to amass huge resources in some specific sectors of the economy without some sort of buffering or regulatory mechanisms.

In "Free Market Environmentalism" (Anderson and Leal, 1991, Palgrave:New York, ISBN 0-312-23502-X), the case is made that the free market and personal property rights provide the best way to ensure protection of environmental quality: personal stewardship of the land is always preferred to governmental oversight prescribed through legislation or administration. The problem with the free market is that the laws of supply and demand don't apply well to a) limited resources that are essential to life, and b)time spans that are longer than human memory. Supply and demand says that we will never run out of a resource. Once it gets too costly some other commodity will arise to replace it. That works fine for widgets but not for potable water--we simply can't make more (to increase supply and decrease cost) or find a substitute. Nor can pressures put on a natural ecosystem respond fast enough to respond to immediate human needs. In the Northern Rocky Mountains we are currently experiencing an infestation of pine bark beetles due to a decade of drought, high summer temperatures, and lack of "deep freeze" intervals in the winter that can kill the beetles. The result is that hundreds of years of forest growth will be lost in a conflaguration of wildfires that will obviously have detrimental impacts on communities throughout the Rockies. The recovery of this landscape will be far too slow to accomodate society's need for forest products, to protect watersheds, and the desire to live in aesthetically pleasing locales. The time scale in which the economy moves (measured in seconds in this global digital age) is orders of magnitude removed from the rates in which natural processes work.

The other problem with Free Market Environmentalism has to do with the precept that personal property rights trump all others. What is missing in this argument is personal responsibility in managing personal property. Anthropogenic causes can often lead to natural effects, e.g. a leaky septic system on one property will cause effluent to flow down gradient and into another piece of property; disturbing the dynamic equilibrium on a shoreline by building groins or jetties will cause erosion on one property and deposition on another. Natural processes do not respect artifical property boundaries (nor geographic boundaries between cities, counties, states, or countries). Without system-wide management, i.e. through regulatory actions to ensure that there is equal protection under the law for all, individuals would otherwise be free to do whatever they please on their land to the possible detriment of all.

Further, the profit motive of corporations is contributory. Yes, there is a fiduciary responsibility to work towards profits for the investors. But, it all depends on how you do the accounting. It is indeed cheaper on one scale for a factory to dump wastes into the river and not pay for appropriate disposal. That's one way to maximize profits for investors. But what is the cost to the larger community in terms of public health, worker safety, ultimate costs incurred by the government to mitigate hazards to the community, loss of recreational opportunities to the community, and other intangible costs such as loss of habitat, diversity of species, etc.?

An Earth System perspective would help economists understand concepts related to closed system (finite resources), natural processes that proceed on time scales beyond human memory that ultimately effect society, processes that are indifferent to who "owns" a piece of property as defined by artificial boundaries, and the long-term, ultimate costs of economic decisions that impact the larger population and planet.

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In today's New York Times business section (http://www.nytimes.com/2009/09/23/business/economy/23gdp.html), Peter Goodman reports on a new study by two Nobel prize winning economists (Joseph E. Stiglitz and Amartya Sen) who question the widespread assumption that economic growth should be the goal of policy makers.

"According to the report, much of the world has long been ruled by an unhealthy fixation on swelling the gross domestic product, or the quantity of goods and services the economy produces. With a singular obsession on making G.D.P. bigger, many societies - not least, the United States - failed to factor in the social costs of joblessness and the public health impacts of environmental degradation."

"A growth-oriented policy encouraged homeowners to borrow as if money need never be repaid, and industry to produce products as if the real cost of pollution were zero..."

The report was commissioned by President Nicolas Sarkozy of France. The English version is at: http://www.stiglitz-sen-fitoussi.fr/documents/rapport_anglais.pdf

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